Thurow’s Infonomics

By

October 14, 1999

We are entering, techno-boosters breathlessly proclaim, a “third industrial revolution,” that of the “knowledge-based” or “new” economy. Unlike revolutions one and two–the steam engine and then the electric power tools that liberated us from dependence on muscle labor–this time it is the human mind, somehow magnified by dazzling new gadgets and software, that is supposed to generate economic value: Knowledge workers will make heaps of money manipulating data, engineers will create massively automated systems of unprecedented productivity and, meanwhile, scientists will control the structure of matter and even of life itself for our benefit. By contrast, ownership of property and industrial capital are losing their traditional roles as sources of wealth. From the explosion in high-tech stock values to the relentless pace of “development” in computer and telecommunications technologies, self-appointed “smart” observers (for example, the Wired magazine crowd) are quick to point out the signs of this revolution everywhere. The only drawback to this glorious new era, we are informed, is the unavoidable suffering that economic change brings to “redundant” factory workers and middle managers. It’s all about “creative destruction,” the unavoidable prerequisite to the creation of new wealth.

For all its seductive hype–and the cult status of Wired illustrates how extolling the third industrial revolution has become a cottage industry in itself–this vision remains controversial and unproven. In Building Wealth, MIT economist Lester Thurow wants to examine it all by applying a formula he has honed to perfection in previous bestsellers: He articulates, and to a degree analyzes, trends that we find confusing and frightening, tying them together in coherent form. Only this time, while swallowing the fashionable rhetoric of info-revolution whole, he plays a kind of booster who also wants to be a critic. With one foot anchored in the camp of those who fret about the direction of American capitalism, myself included, Thurow paints a disturbing picture of widening income gaps, declining real wages and the disappearance of traditional career paths. However, barely able to contain his enthusiasm for the enormous fortunes being amassed in the name of high technology, Thurow also yearns to run with the techno-boosters, as symbolized by the “glittering eye” atop the “wealth pyramid” on the back of the dollar bill. Thurow repeatedly points out in awe that the net worth of Bill Gates, now approaching $100 billion, equals the combined wealth of the bottom 40 percent of the American population. “Wealth,” Thurow writes, “is the only game to play if you want to prove your mettle…. If you do not play there, by definition you are second rate.” Thus Thurow’s other foot is marching briskly forward. The result is an awkward book that tries to do too many things at one time.

Thurow is at his worst as a techno-booster pundit. Except for some vague references to the growing importance of knowledge in wealth creation, he never clearly defines what is new about the so-called knowledge-based economy. Is it the systematic application of science to business problems? The emergence of new technologies? Or sheer computing power? Rather than address these questions, Thurow presents a series of faintly illustrative anecdotes, such as the use of seismographic tests in the search for oil, which have replaced the old-style wildcatters who simply drilled holes. This leaves a huge gap at the core of the book, allowing Thurow to avoid legitimate questions about whether the revolution exists as of yet (it doesn’t) or whether the Panglossian visions of the Wired crowd simply conceal traditional, extremely conservative economic views (they do). Aggravating this problem are the thirteen “New Rules” of his subtitle, which fail almost comically to add to the text. For example, Rule One states: “No one has ever become very rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist.” Such observations, which in my opinion are beneath Thurow’s dignity and talent, are sprinkled abruptly throughout the book as if some editor added them to mimic the banality of the Seven Habits of Highly Effective People.

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It would have been far more useful for Thurow to step back and ask whether this booster rhetoric is premature or if it is even “revolutionary.” For starters, the personal computer, which is the principal pillar of the “new” economy, is not living up to expectations. Though faster and more powerful PCs appear every few months, in spite of a recent uptick in productivity statistics so far they have failed to enhance average worker productivity in significant or sustainable, measurable ways. This means either (1) we cannot effectively use the faster chips, larger memories and “more sophisticated” software or (2) these improvements function less well than claimed. Despite the fact that I am working on my fourth PC, for example, I do not find that it operates appreciably better than the first one I bought, in 1986: I find myself still irritated by breakdowns (the machines are more complex, thus more fragile); by useless “corrections” to my operations and the constant expectations of cosmetic re-edits (prettier, but content-neutral). The bugs in these specious add-ons, I believe, cancel out most productivity gains in attributes like computer clock speed. But I needed each new PC to connect–to be “compatible”–with my colleagues and editors, and so we continue to scramble on the treadmill of continuous upgrades. It is, in a sense, a self-reinforcing scam: You constantly find yourself buying new software and hardware, which operate, “improve” and appear in suspiciously close concert.

Furthermore, the industries that techno-boosters celebrate are built on far shakier ground than is often acknowledged. Almost all of those hot new Internet companies remain stubbornly unprofitable, some disastrously so; while Amazon.com’s sales revenues are expanding at a healthy clip, its losses are growing twice as fast, and may top $500 million in 1999. In other words, the more Amazon.com sells, the deeper it falls into the red. Of course, as trailblazing e-commerce companies, it is possible that they have some novel business model in mind and that we should sit tight. But it is more likely that the phenomenal leaps in the stock prices of Internet companies are the ephemeral result of investor speculation–a bubble waiting to burst. The biotechnology industry is similar: While there are a handful of profitable companies, the overwhelming majority of them simply can’t design products that work much better than traditional pharmaceutical or agricultural brands. In defense of these industries, techno-boosters invariably argue that it is too early to judge (or “accurately measure”) these results and that extremely high failure rates are typical of “embryonic” industries. Which is precisely my point.

Even the booming PC and telecommunications industries, which are the engines of nearly 35 percent of the growth in the US economy, are vulnerable. The upgrade scam carries the seeds of a consumer revolt: Eventually, we may refuse to buy into the next generation of “improvements.” After decades of ineffectual investment, many businesses appear to be considering this option. Moreover, because the growth strategies of these companies are so closely interwoven, hardware and software could decline together, sucking the rest of the economy and an overvalued stock market down with it. At any rate, an information-technology recession could finally put the sector back into realistic perspective: It has improved productivity in certain limited applications, but overall, its impact has been modest. For example, e-commerce may become the norm in highly technical business-to-business transactions even if it isn’t replacing consumer shopping malls yet. Finally, since we already know that “knowledge is power,” the info-economy rhetoric may represent an insipid retread of familiar Machiavellian aphorisms. If there is a revolution in the cards, it lies somewhere in the future, that is, in the natural domain of techno-boosters.

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Nonetheless, Thurow is a very good worrier. Sensing that something may be amiss in the economy, he returns with conviction to his familiar themes of education reform, the impact of social systems on economic well-being and the need for government investment strategies to create long-term advantages. Though more traditional economists disdain Thurow’s willingness to plunge into messy subjects that transcend their basic algebra, it is here that he has the most to contribute to the national debate. That glittering eye on the greenback, he says, must be supported by a solid base in the “wealth pyramid”; that is, in order for any economic revolution to take hold, workers have to benefit as well. Unfortunately, this is not happening.

While American entrepreneurs and inventors appear to be pulling far ahead of their industrial rivals in Japan and Europe, Thurow argues that persistent weaknesses continue to threaten the future prosperity of America. First, he observes, US educational standards for the average worker–the foot soldier whose schooling stops before he obtains an undergraduate degree–are among the lowest in the developed world. This educational rift hinders them from learning and adapting quickly to new manufacturing methods and the growing number of computer-dependent jobs in the economy. As a consequence, many high-paying manufacturing jobs have been shipped overseas during the past twenty years, which forced the bottom two-thirds of the American labor force to move into the service sector, at an average pay cut of one-fifth of their real income. In contrast, across the divide of the first-rate graduate education available only in the United States, the upper third (the generals) is doing better than ever and apparently feels little loyalty toward lower-level employees. Thurow sees America becoming a two-tiered society, split between the highest-paid executives in the world and those forced to accept low wages; its shrinking middle class must work longer hours for lower pay, and more mothers must find jobs. In such an economy, he wonders, what are the real benefits?

Second, American spending patterns have shifted decisively toward consumption and away from investment in tools, that is, in factories, equipment, offices, houses and infrastructure. This means Americans have decided that it is better to live in the present, buying more and more consumer goods, directly at the expense of tools for future generations–deprived of up-to-date capital, our children’s productivity, and hence their living standards, can rise only at the expense of someone else’s in a zero-sum game. By contrast, Thurow observes that in Europe and Japan investments have been higher, which partially explains why their service sectors are equipped with more advanced technologies and their wages have fallen less; they have chosen a different balance, though in Europe it has contributed to record levels of unemployment. To his credit, Thurow makes the unfashionable argument that only government can mobilize the resources required, both in education and in tool creation. He writes, “What needs to be done doesn’t get done if societies rely solely on private markets.” Government needs not only to put down more money for these tools and for research and development but it must also mold the incentive system to do so through tax and intellectual property policy, to name a few measures. These thoughts, which deserve wider debate, are lost in the glare of America’s current expansion.

The flaw in Thurow’s logic is embedded in his assumption that some ill-defined “third industrial revolution” is propelling these troublesome developments. If this revolution is more about marginal gains in productivity than quantum leaps, as the evidence suggests, then something else must be happening. A less flashy explanation might emphasize corporate behavior rather than technology or the possession of knowledge: (1) Better communications and transportation technologies have helped employers relocate manufacturing facilities to cheaper locations in the Third World; (2) the rise of temporary workers in the service industry has allowed employers to refuse to pay for health insurance and other (costly) basic rights; (3) techno-hype has combined with the economic expansion of the nineties to create a speculative bubble on Wall Street, pushing up real estate prices to unsustainable levels and encouraging stock owners, who feel richer, to consume more. In other words, it is less the aftereffects of a technological revolution that are hammering down the living standards of most Americans than corporate greed and the forces driving globalization. Even worse, once stock prices deflate to more realistic levels, the great American boom of the nineties will reveal itself to have been a typical financial craze, the kind that inevitably leads to meltdown.